Bai al Inah and Tawarruq – Credit Financing

The need for cash for personal use is a genuine necessity of modern living and Islamic banks have developed innovative ways to provide such cash. Bai al-Inah and Tawarruq are two techniques used in Islamic finance to raise money for personal financing circumventing the prohibition of interest. In Bai al-Inah, the person in need of cash of acquires a product from the lender on credit and then immediately sells it back to the lender at a lower cash price, hence raising immediate cash without involving interest. The lender makes a profit from the difference in cash and credit price. This transaction is not Shari’ah compliant according to a large number of scholars; however, in some countries, the scholars have allowed it based on needs of the modern times.

Tawarruq is another action which is practiced by Islamic Banks for provision of cash without interest. This transaction is accepted by most Shari’ah scholars provided it is not abused. Tawarruq also consists of the lender providing a product to the borrower on credit. The borrower then sells the product to a third party for immediate cash which is lower than the credit price. The bank makes the profit on difference of cash and credit price. Sometimes banks work with brokers who provide the buy and sell contracts and the product never actually changes owners. This could be an abuse of Tawarruq and may not be a valid transaction.
Tawarruq is considered a valid transaction since there is trade involved and parties take commercial risks and generate profit by arranging for the trade. Both transactions of Tawarruq must not be carried out in a single session on agreed upon prices. This will make the transaction invalid as commercial risk associated with purchase, possession, and sales are eliminated. There must be a time lapse between the sale of the goods by the lender to the borrower, and then the sale of the same to the third party. As long as the sale and purchase is carried out under two different contracts, there is no risk of involving interest.